New Zealand Electricity Market

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Up to 1994, the New Zealand Electricity Market had a system of monopoly providers of generation, transmission, distribution and retailing. Since then, a step-by-step process of industry reform has led to the separation of the monopoly elements from the contestable elements to create competition in energy generation and electricity retailing. The industry is a mixture of state-owned enterprises, Trust Owned Companies and Public Companies.

The wholesale market for electricity is administered by M-co on behalf of the market regulator, the Electricity Commission. The main participants are seven generator/retailers who trade at 244 nodes across the transmission grid. The generators offer their plant at grid injection points and retailers bid for electricity offtake at grid exit points. There is a Reconciliation Manager who reconciles all metered quantities, a Pricing Manager (M-co) who determines the prices at each node, a Clearing and Settlement Manager (M-co) who pays generators for their generation at the market clearing price and invoices all retailers for their offtake. Prices and quantities are determined half-hourly at each node. The transmission system is owned and operated by a state-owned enterprise, Transpower which performs the functions of Grid Owner, Grid Operator, Scheduler and Dispatcher for the wholesale market.

Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of 28 distributors who have monopoly control of the lines services on their networks. Ownership of distributors, also known as lines companies, is through Trust Owned Companies or Public Companies. Consumers can choose from up to seven electricity retailers, who are also generators, for their energy supply. Competition for retail customers varies across the country but since 1999, when full retail competition was introduced, customers have switched at a rate of about 12% per annum.

Regulation of the electricity market started in a light-handed fashion but there has been an increasing trend towards more heavy-handed regulation. Light-handed regulation is based on the Threat of Regulation providing an incentive on companies with market power to exercise self-regulation. The normal regulatory legislation such as the Companies Act, Electricity Act, Resource Management Act 1991, the Commerce Act 1986, and the Fair Trading Act 1986 provide the framework, for regulating normal commercial and environmental transactions.

The government has increased the extent of intervention through the Electricity Industry Reform Act 1998, which forced power companies to divest either their energy or their lines business, and the Electricity Amendment Act 2001. The latter led to another round of industry reform concentrating on achieving better governance of the electricity market and tighter control of monopoly functions. The "Threat of Regulation" was extended to the production of a set of regulations that would be brought into effect if the industry's self-regulation did not meet the Government's criteria.

On May 16, 2003 the result of a referendum by industry participants and customer representatives on a proposed set of self-regulating rules was announced:

Consumers voted 4.4% for the proposal
Traders voted 66.2% for the proposal (Traders = generating companies and retailers)
Transporters voted 47.4% for the proposal (Transporters = distributors and Transpower)

As there was not a substantial majority of all classes in favour of the proposal it was not implemented.

The result put paid to the prospect of a multilateral agreement on the governance and operational arrangements for the electricity market. The New Zealand government invoked the regulations already prepared to meet this contingency. The "Threat of Regulation" had been insufficient to stave off regulation.

On 2 July 2003 a draft set of Electricity Governance Regulations and Rules was issued on behalf of the Minister of Energy by the Electricity Commission Establishment Unit (ECEU). This set was for consultation purposes and after submissions were received and reviewed, a set of regulations and rules was recommended to the Governor-General.

In September 2003 a revised set of draft rules and regulations was issued by the ECEU for submissions by the end of October. The set did not include proposed transmission regulations, which were still being drafted. Also in September the Minister of Energy announced the chair and members of the Electricity Commission. Roy Hemmingway, whose most recent position was chairperson of the Oregon Public Utility Commission in the USA, will chair the Commission.

The final set of Electricity Governance Regulations and Rules (excluding rules for transmission) became effective on 1 March 2004.

The final chapter of the Electricity Governance Rules, on transmission, was gazetted on April 28 to become effective on 28 May 2004.

[edit] Current Market Structure

As mentioned above, the New Zealand electricity market is split into the following areas: administration and market clearing (M-co), regulation, generation, transmission, distribution and retailing.

The current legislation (Electricity Industry Reform Act) prevents the ownership of cross-sector, that is energy and lines functions, investment. This means a generation company cannot own or have an interest in a distribution company and a distribution company cannot retail electricity or deal in electricity hedges. There are two exceptions to the regulations: generation companies can own the lines required to transport electricity from their power stations to the grid or local distribution network; and distribution companies can own a small amount of conventional generation capacity within their network but are not limited in the level of renewable generation capacity. There is no barrier to vertical integration from generation to retail. The overall arrangement of the industry creates some very interesting market behaviour amongst the players.

First of all, generation is dominated by five companies: Meridian Energy Limited, Contact Energy Limited, Genesis Power Limited, Mighty River Power Limited (named after the mighty Waikato River - the longest river in NZ), and TrustPower Limited. These five companies combined produce or control more than 95% of NZ's total electricity generation.

The retail space is dominated by the same five companies - Mighty River Power's retail arm is better known as Mercury Energy. The generation and retail companies use this vertical integration as a natural hedge to remove some of the risks associated with the spot market. For example, during a dry year, the high prices in the wholesale market price benefit the generation arm but hurts the retailers who buy at wholesale prices and sell electricity to consumers at fixed prices; when prices are low, the loss of profits in the generation side is offset by the profits in the retail business. These five companies have now extended their risk management strategy further by aligning their retail and generation businesses to the same geographic locations. For example, the majority of Meridian Energy's generation assets are in the South Island, and that's where their retail strongholds are. Mighty River Power's generation assets are exclusively in the North Island, and Mercury Energy's customer base is also exclusively in the North Island.

[edit] History of reform

The major milestones in the reform process in New Zealand between 1993 and 2004 were:

  • October 2004 - The Electricity Act was amended to increase the powers of the Electricity Commission.
  • 1 March 2004 - The Electricity Commission took over control of the New Zealand electricity market from the self regulating bodies, the MARIA Governance Board (MGB) and the Rules Committee of the NZEM.
  • September 2003 - As a result of submissions received, revised rules and regulations were issued for further consultation. A revised Government Policy Statement was issued for submissions and the Electricity Commission was appointed
  • July 2003 - A draft set of regulations and rules was issued for consultation.
  • May 2003 - The rules developed by EGEP fail to gain sufficient support in the referendum to avoid government regulation.
  • April 2003 - An industry referendum on the outcomes of the Electricity Governance Establishment Project (EGEP).
  • December 2000 - Government Policy Statement published.
  • November 2000 - Electricity Governance Establishment Project set up as a result of the government's review of the report of the Ministerial Inquiry.
  • June 2000 - The report of the Ministerial Inquiry is published
  • February 2000 - The Ministerial Inquiry into the electricity industry begins
  • April 1998 - Government announced the Electricity Industry Reform Act, which included:
    • Privatising Contact Energy Limited
    • Splitting ECNZ into three competing state-owned enterprises
    • Instructions to all energy companies to split their retail and lines businesses and sell one or other within a set time period
  • October 1996 - The reformed wholesale electricity market (NZEM) began trading
  • April 1996 - Contact Energy commenced operations
  • February 1996 - An interim wholesale market is put in place allowing ECNZ and Contact to begin competing.
  • June 1995 - After an exhaustive policy debate, the Government announced significant reform of the electricity industry including a framework for buying and selling electricity through a wholesale pool
  • July 1994 - NZEM commences trading as a secondary market for ECNZ hedges. An independent market surveillance committee was formed.
  • April 1994 - Transpower separated from ECNZ and established as a stand-alone state - owned enterprise.
  • April 1993
    • Electricity Market Company (now M-co) established as a joint venture by New Zealand electricity industry players to act as a focal point for the design of a wholesale electricity market.
    • The Metering and Reconciliation Information Agreement (MARIA) was set up as a multilateral arrangement to allow for retail competition for customers with half-hour interval meters.
    • Former local electricity supply authorities established as energy companies
  • Prior to 1987, a government department – the New Zealand Electricity Department (NZED) controlled and operated almost all New Zealand electricity generation and operated the New Zealand electicity transmission grid

[edit] External links

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